Day trading can be extremely risky if not approached correctly. You risk losses that might extend further than your initial investment anytime you decide to trade on margin or short sell.
When a person decides to learn how to trade financial markets, the initial realization of how much there is to learn can be quite overwhelming. Most beginning traders are disillusioned into believing they will be able to turn $10,000 into several hundred thousand dollars in a year, but once a person begins trading, the harsh reality of how difficult trading is becomes very real. Currency trading and other form of margin trading is very risky and it is essential that a beginning trader understands these risks and acts accordingly.
Trading is similar to every other legitimate profession in the sense that it takes several years to become a professional. The professional fields of architecture, engineering, and medicine each demand initiates to undergo several years of educational training followed by lengthy on-the-job training (internships and junior positions) before they are fully accepted into the field as professionals. Trading is no different. One of the most important things a trader must discover early on is what timeframe chart he wants to trade. This decision is critical.
Day Trading
Day traders open and close positions in the same day, and at the end of the day, they are always flat, meaning they have no open positions they are holding through the night. Day trading is a broad term and basically includes two general types of traders: scalpers and intraday traders. A scalper is a trader who is usually holding a trade for anywhere from a few seconds to a few minutes. A true scalper may open and close tens or even 100+ trades in a day. An intraday trader tends to hold trades for anywhere from 5-10 minutes up to several hours. While scalpers pay attention to tick charts and 1 Minute charts, an intraday trader will usually trade off 5 Minute, 15 Minute, and 1 Hour charts.
Pros & Cons
- Not subject to overnight economic developments
- High transaction costs
- Risk is relatively easy to assess
- Very psychologically demanding
- Less subject to intraday news developments
- Must be in front of computer for hours a day
- Potentially rewarding if done correctly
- High failure rate
Swing Trading
Swing traders are generally holding positions for at least a few hours. Usually trades are held for at least 1 night and they can be held for several days or even weeks. Swing traders are generally attempting to catch swings in a market trend. Swing traders are generally paying attention to the weekly, daily, 4 hour, and 1 hour charts, although lower timeframes may be used for trade entry and exit.
In the forex market, swing traders are generally aiming for 50+ pips, and oftentimes the trades turn into 100+ pip trades. The forex market lends well to swing traders because large swing moves are very common.
Pros & Cons
- Does not require focus of daytrading
- Positions subject to unexpected news events
- Many argue much less stressful than daytrading
- Can be difficult to let profits run
- Technical setups tend to be more reliable
- Trades may need to be taken during sleeping hours
- Depending on strategy, may involve only a few minutes in front of computer each day
- Tracking trades can be difficult if you are not in front of a computer
Position Trading
Position traders are holding trades for several months or even years. A true position trader is generally trading based on fundamental analysis and forex news, but position traders can also play the market based on technical analysis. This type of trading, along with swing trading, is most conducive for people who still hold full-time jobs and do not have the luxury of looking at the market every day. As a position trader, only a few hours a week, if even that, are needed to analyze the market and adjust positions.
Pros & Cons
- Least stressful approach overall
- Positions subject to unexpected news events
- Little time requirement
- Can be difficult to let profits run
- Technical setups tend to be more reliable
- Large stop losses can be difficult psychologically
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written by: Tom Cleveland
Tom has had an extensive career in the international payments industry with over 30 years of experience in executive management, corporate governance and business development. Find more of Tom's opinions and research featured on ForexTraders.com, a complete resource to the forex market.
